Cathay Pacific Haitong: Energy cools and America's core inflationary pressure spreads

The Zhitong Finance App learned that Cathay Pacific Haitong released a research report saying that in October, the US CPI was 0.4% month-on-month, and the core CPI recorded 0.3% month-on-month for the third month in a row, all higher than market expectations. Structurally, energy, used cars, and housing are cooling down at the same time, but tariff-related goods and cost-sensitive services such as transportation have clearly heated up. Excluding used cars and housing, core inflation has risen to 0.4% month-on-month, and the scope of price increases has expanded. The bank believes that this may mean that the second round of transmission of oil prices is under way; on top of the expectations of non-agricultural supermarkets in October, the interest rate hike in December was basically determined, and the extent of the interest rate hike became the focus.

Cathay Pacific Haitong's main views are as follows:

Both CPI and core CPI exceeded expectations month-on-month. In October, US CPI fell from 0.6% to 0.4%, higher than market expectations of 0.3%; core CPI remained at 0.3% month-on-month, higher than market expectations of 0.2%, and the quarterly core CPI rate fell slightly from 4.1% to 3.6% month-on-month. Energy fell from 5.2% to 0.7% month-on-month, with gasoline falling from 9.1% to 1.0%; since November, oil prices have declined further, and the energy segment may turn negative month-on-month in November. Core services drove CPI by about 0.2 percentage points month-on-month and became the main driver.

Used cars and rents have cooled down, and the core pressure has spread to a wider range of segments. In terms of core products, used cars changed from 0.7% to -1.2% month-on-month, driving the decline in core products, but the Manheim Index has already rebounded in October, and the downward pressure on used car prices is expected to weaken from December; price increases for tariff-related products such as furniture, home appliances, and toys have accelerated markedly, while increases in computers and peripherals continue to narrow. In terms of core services, owners' equivalent rents and main residential rents fell to 0.32% and 0.20%, respectively, but the housing rent index continued to rise, and rents fell or were difficult to sustain; excluding core housing services, cost-sensitive segments such as motor vehicle insurance, maintenance, and public transportation clearly heated up. Excluding used cars and housing, core inflation rose from 0.3% to 0.4% month-on-month. The bank believes that this may mean that the second round of oil price transmission is underway, the ISM service industry price index is still high, enterprise costs have not been fully transferred, and there may still be upward pressure on subsequent core services.

The interest rate hike in December was basically confirmed, and the extent of the rate hike became the focus. After the CPI was announced, CME FedWatch showed that the probability of the December interest rate hike included in the market rose from 84% to 100%, of which the probability of raising interest rates by 50 basis points rose to about 9%; 2-year US bond yields rose by up to 15 basis points, breaking 5% at 10-year terms. The US dollar strengthened, and gold and US stock futures declined. Director Waller said that if the core CPI is around 0.3% month-on-month in October, an interest rate hike of 50 basis points should be considered in December. The bank believes that the 25 basis point rate hike in December is still the benchmark situation, and the possibility of raising interest rates by 50 basis points is rising. The October PCE and November non-farm payrolls announced before the meeting will be the key.

Risk warning: The stalemate in Iran caused oil prices to rebound for the second time, and the hawkish tendencies of the Federal Reserve exceeded expectations.